How Churn Can Pose A Great Threat to Revenue?
The Sneaky Nightmare Everyone Overlooks
You have poured sweat and tears building your brand, done tons of marketing, and labored hours making your products and services perfect. Yet you see revenue figures take a dive down over time. The sneaky reason for such a case is Customer Churn. It does more harm than we like to care about and therefore its effects are often overlooked. Here is a breakdown of how it is the absolute worst nightmare for our company and your company’s revenue figure.
There are two types of scenarios for churn cases. One for subscription-based companies and the other is the regular companies.
If you are providing a subscription-based product or services, you earn a steady amount of money from a user. Let's just say 5 dollars per month. If Next month 5 Customers churn and unsubscribe from your services, you will be losing 25 dollars per month from those churn customers for months to come.
Companies like Netflix and Spotify spend heavily on the topic of churn and how to minimize them. The effect is very explicit, and this hurts more because you know exactly how much revenue is slipping through your fingers. In other words, you will be missing a guaranteed revenue in the months to come. This is more severe as the revenue was fixed and stable for upcoming months if the customer continued the subscription. Just imagine the effect when the churn cases are in thousands or in some cases millions.
Therefore no matter how much you are spending on product development, you must consider spending on this matter too. In the long run, this will not yield more revenue but will let you keep the revenue in check from the existing customer base. So do not overlook this matter.
Traditional Nonsubscription-Based Companies
If you are a traditional company then the effect will be similar yet different. There is no steady flow of revenue like the subscription-based ones. The revenue loss will vary and can be more devastating than the subscription-based case.
Here is a scenario for the e-commerce industry. If 5 customers do not shop from your e-commerce anymore you will be missing out on all the future revenue from these customers. The revenue loss is much larger. Their online purchases will be different. Each of the customers might have spent hundreds or even thousands of dollars. Where a subscription-based company would have lost 25 dollars, you might miss out on hundreds or thousands of dollars. Imagine the revenue loss from thousands of churn customers. The revenue loss will be enormous and unprecedented.
You might spend heavily on product development, system development, but the churn usually happens for other hidden reasons. You have to turn your attention towards the churn analysis as well, pay more attention to the customer's behavior their needs.
Tune in for the next blog where I will share a simple yet effective way to reduce churn and reduce revenue loss.
Measuring the Lost Revenue
So how do we quantify the revenue loss? The down to detail will vary from industry to industry and company to company. However, the general notion is more or less the same.
For subscription-based companies, it's really a straightforward calculation. Just find out the number of unsubscribed users and multiply them with the monthly subscription fee. That's your revenue loss per month due to churn.
For other companies, the method is a little less straightforward. The measurement is more like an estimation method. There are two parts to the calculation.
- First, you have to calculate the churn rate for the period. Let's say you are an e-commerce company and you consider customers to be churn if they do not purchase from your website for more than 3 months. In such cases, those customers will be your churn customers. The 3 months are just an example and will vary from business to business.
- Each of the churn customers had made several purchases from the website in the past. So if you calculate their average spending for a month, you will be estimating the monthly revenue loss from that customer for future months. For instance, if I had 10 orders till now totaling 1000$ and I have been active for 5 months, this does not matter if I made a purchase each month or not, then on average, you will be losing 200$ from me if I become churn in the future. Therefore find out the average spending per month from these churn customers and you will find in total the monthly revenue loss due to the churn.
No matter what type of business you are running churn will harm you nonetheless. You either feel it explicitly or implicitly, like I mentioned earlier. The realization becomes more real when you can see the revenue loss in numerical figures. Therefore, you must first try to estimate the amount of revenue slipping through your fingers each month due to this churn case. As a result of this whether you like it or not churn will become a nightmare for you and your company. No one likes to see a possible revenue slip through their fingers while you can surely stop that from happening. Tune in next week for a hands-on case study on how to reduce the revenue loss over time.